The age of austerity exposes the severe failings of British commitment to growth dependent on the financial sector, in particular the problems created by excess indebtedness. Of course, the coalition government in the UK takes every opportunity to point out the inherent economic problems associated with high public debt levels, evoking metaphors of the household “living beyond its means” or “maxing out its credit card”.
Yet, for all the political theatrics about public borrowing, the government seems perfectly content for its citizens to borrow ever more (at much higher cost) in order make up a difference brought about by cuts to public services and the rising cost-of-living. Apparently we must borrow to push and pull the economy out of the doldrums, because government and industry will not.
Payday lending is the quintessential example of the failures of the British political elite to understand (let alone do something about) the scale and scope of the problems facing the economy. The astronomical growth of the industry since the onset of austerity is perhaps illustrative enough.
Admittedly, the re-branded Financial Conduct Authority (FCA) is proposing modest new regulations to curtail the worst practices of this industry. A very small step in the right direction. However, light touch regulation of financial services is seen as a cornerstone to national competitiveness, which is why the FCA is tasked with changing the culture of banking rather than regulating their business models.
Therefore, the FCA will not commit to an interest rate cap on payday lending. It instead advocates more robust affordability checks and a greater role for debt advice charities before an individual takes out a payday loan. More concrete proposals limit the number of times a payday loan can be rolled-over (with the same provider) to two and the ability of lenders to take money directly from customer bank accounts.
This is a sensible start but simply not enough. The Office for Fair Trading (OFT)‘s report on payday lending along with multiple other accounts already demonstrate how out-of-control the payday lending industry is in the UK.
A recent event hosted by the Centre for Economic and Social Inclusion (CESI) brought together key stakeholders and advocacy groups, along with the FCA, to discuss the future of payday lending in Britain. CESI director Damon Gibbon explained how his organisation has been working on the problems with high-cost credit for 15 years with little by way of actual changes to show for it.
Rather than wait for the powers that be to take notice, the CESI event sought to work from the ground up. Civil society groups, trade and credit unions, looked at co-ordinating their work to provide bottom-up alternatives to high-cost lending.
Credit unions offer more socially conscious high-cost credit products. However, too often they are the ambulance sent to rescue the failures of retail banking industry. One representative of a Birmingham-based credit union lambasted the strict regulations that limit their ability to lend to the poorest — especially compared to their payday lending counterparts.
These regulations mean that promoting credit unions will not put a dent in the rapid growth of payday lending; instead what is needed is a real alternative to high cost credit for those without access to mainstream finance.
What is becoming clear is that the fight against payday lending should not only focus on the national financial regulator, especially one designed for light touch regulation. It also needs to involve a coalition of social actors like credit unions, trade unions, charities and church groups as well as free social service providers like the Citizens Advice Bureau and, most importantly, Local Authorities.
The problem so far is not a willingness to do something about payday lending. Rather, it is the hope that someone else will do the heavy lifting.
Poverty drives demand
Of course the elephant in the room when debating the minutia of local planning laws and national financial regulation of the payday lending industry is the poverty and desperation driving the demand for payday lending in the first place. It is clear it is intimately linked to economic stagnation and the politics of austerity.
However, rather than develop a comprehensive set of policies to get the economy out of the doldrums and provide new opportunities for the Precariate, the coalition government supports more high-cost credit for those unable to make ends meet. Essentially, we are seeing debt promoted as a safety-net.
The poorest and most desperate Britons are borrowing for food, shelter and basics, and being charged thousands of percent interest rates. Meanwhile the major retail lenders enjoy zero interest rates (sometimes negative rates in real terms). It’s a clear moral outrage, but the coalition government refuses to address the issue in any meaningful way.
On the contrary, while it derides its own borrowing, the government seems perfectly content for society to borrow itself into oblivion.